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August 3, 2010

Engineering Talent Dilution or Why Every Start-up SHOULD NOT Get Funded

Two hot topics, both concerning the building of businesses. Recruiting engineers to scale great businesses is one of the most vexing problems facing start-up founders and their backers today. There just doesn’t seem to be enough of them around, and the problem is even more acute in NYC than it is SF. But is the problem simply that we don’t produce enough of them, or that they are otherwise engaged? Perhaps the answer is both.

During my breakfast with David Tisch (@davetisch) today, we were kicking around ideas as to why the shortage of engineers is increasingly painful. His hypothesis: due to the fact that so many start-ups are getting funded as seed stage capital has become increasingly plentiful, engineers that could be helping scale successful companies are pursuing their own gigs, causing a talent shortage. I have to confess that I never thought about this take on the problem, but it kind of resonates with me. How many “me too” companies have been formed in areas such as reputation management, group offers and travel, just to name a few? While none of these areas are clearly “winner take all,” the sheer volume of start-ups in and around these spaces is indicative of another force at work: lots of seed stage capital financing a number of companies that perhaps shouldn’t exist.

This dynamic highlights one of the big downsides of a “fund every start-up approach” - a dearth of talent available to make moon-shot successes out of great start-ups while a bunch of mediocre start-ups are soaking up scarce talent. Over time, will this top talent find great companies in which to work? Probably. But as long as plentiful and cheap seed capital is out there, serving as an enabler for any top-flight engineer with a me-too idea to take their shot at super-stardom, the companies most in need of their talents will be denied. This is neither good for long-term job creation nor perhaps even the aspiring engineer/entrepreneur, for whom great wealth and achievement could result from being an integral member of a rapidly growing and successful company as well as the benefit of being told no in the face of a weak new business concept. Also, the fast-growing company may not accelerate as rapidly because of a less talented set of engineers working on their project.

An excess supply of capital - with perhaps a dearth of deal discipline - can have a host of unintended effects, one of which is stunting the growth of high-potential companies. Funding every start-up, which means taking a ton of talented engineers off the market by supporting any idea if they have the guts to pursue it? I don’t think so.

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